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History Shows Democrats the Party to Trust on Wall Street Reform

April 24, 2010

In just a matter of days, the Republican effort to protect predatory Wall Street bankers has gone from the ridiculous to the sublime. Last week, Mitch McConnell endlessly parroted Frank Luntz' "permanent bailout" talking point - the day after meeting with financial executives in New York. Then on Thursday, Sarah Palin warned that "financial lobbyists are flocking to DC this week" to hold, as it turned out, a secret meeting with Republican Senators. After McConnell signaled a retreat from his scorched earth strategy to block reform, House Minority Leader John Boehner comically claimed that President Obama sought a "government takeover of the entire private sector."
Now promising an "aggressive effort" to stop the Democrats from reforming the financial system, a Senate Republican aide declared, "The fact is, there is a significant credibility problem with taking their word" for what reform will do.
Sadly for President Obama's Republican opponents, the historical record is very clear: the party of Wall Street regulation is also the one which has consistently provided investors with higher returns in the stock market. Then again, virtually every indicator of the health of American capitalism almost always does better under Democratic presidents.
To be sure, the fact that the Dow has gained 40% in value since President Obama's inauguration has quieted conservative propagation of the "Obama bear market" myth. So for the investor class so fond of perpetuating the myth of Republicans' superior economic stewardship, the collapse of the stock marketing during the Bush recession must be particularly galling. The Standard & Poor's 500 spiraled down at annual rate of 5.6% during Bush's time in the Oval Office, a disaster even worse than Richard Nixon's abysmal 4.0% yearly decline. (Only Herbert Hoover's cataclysmic 31% plunge makes Bush look good in comparison.)
As it turns out, as the New York Times also showed in October 2008, the Democratic Party "has been better for American pocketbooks and capitalism as a whole." To make its case, the New York Times asked readers to imagine having put their money where its mouth is. Contrary to Republican mythology, Americans fare better - much, much better - under Democratic administrations:

As of Friday, a $10,000 investment in the S.& P. stock market index would have grown to $11,733 if invested under Republican presidents only, although that would be $51,211 if we exclude Herbert Hoover's presidency during the Great Depression. Invested under Democratic presidents only, $10,000 would have grown to $300,671 at a compound rate of 8.9 percent over nearly 40 years.

(For the eye-popping chart of the S&P's performance under each of the presidents from Hoover through Bush 43, visit here.)

There's no shortage of studies to show that stock market returns are higher under Democratic leadership. (As it turns out, Wall Street's performance is also better when Democrats control Congress.) In 2000, Pedro Santa-Clara and Rossen Valkanov of UCLA's Anderson School of Business concluded that "that the average excess return in the stock market is higher under Democratic than Republican presidents - a difference of 9 percent per year for the value-weighted portfolio and 16 percent for the equal-weighted portfolio." As the New York Times noted of UCLA study in 2003:

"It's not even close. The stock market does far better under Democrats...
...Professors Santa-Clara and Valkanov look at the excess market return - the difference between a broad index of stock prices (basically the Standard & Poor's 500-stock index) and the three-month Treasury bill rate - between 1927 and 1998. The excess return measures how attractive stock investments are compared with completely safe investments like short-term T-bills.
Using this measure, they find that during those 72 years the stock market returned about 11 percent more a year under Democratic presidents and 2 percent more under Republicans - a striking difference."

In 2002, Slate similarly concluded that "Democrats, it turns out, are much better for the stock market than Republicans":

Slate ran the numbers and found that since 1900, Democratic presidents have produced a 12.3 percent annual total return on the S&P 500, but Republicans only an 8 percent return. In 2000, the Stock Trader's Almanac, which slices and dices Wall Street performance figures like baseball stats, came up with nearly the same numbers (13.4 percent versus 8.1 percent) by measuring Dow price appreciation. (Most of the 20th century's bear markets, incidentally, have been Republican bear markets: the Crash of '29, the early '70s oil shock, the '87 correction, and the current stall occurred under GOP presidents.)
According to almanac editor Jeffrey Hirsch, the presidential party figures are among the most significant he's found. If the stock market were random, we'd expect such a result only one-quarter of the time. "I don't know why people are convinced Republicans are good for the stock market," Hirsch says.

Why? Because Republicans and their conservative water carriers continue - with great success - to perpetuate the fraud that the regulation-free policies of the GOP that benefit them personally somehow help the American people overall.
And Sarah Palin is no exception. Quoting fwithout attribution from a National Affairs article by professors Oliver Hart and Luigi Zingales, Palin concluded her Facebook lecture:

Commonsense conservatives acknowledge the need for financial reform and believe that government can play an appropriate role in leveling the playing field and protecting "the dynamism of American capitalism without neglecting the government's responsibility to protect the American public." We're listening closely to the reform discussion in Washington, and we know that government should not burden the market with unnecessary bureaucracy and distorted incentives, nor make a dangerous "too-big-to-fail" mentality the law of the land.

Of course, Sarah Palin is fond not only of misappropriating the words of others, but comparing herself to Harry Truman. Sadly for Palin and her GOP allies, Truman long ago offered the recipe for reform of the financial system and for the American economy overall:

"If you want to live like a Republican, vote Democratic."

(For more data and charts showing the best path to prosperity is to elect Democratic presidents, visit here.)


About

Jon Perr
Jon Perr is a technology marketing consultant and product strategist who writes about American politics and public policy.

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